AAK AB (publ)
STO:AAK
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
207.9369
340
|
| Price Target |
|
We'll email you a reminder when the closing price reaches SEK.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
AAK AB (publ)
You don't have any saved screeners yet
Good day, and welcome to the AAK Second Quarter 2022 Interim Results Conference Call. [Operator Instructions] Please note today's event is being recorded.
I'd now like to turn the conference over to Johan Westman, President and CEO. Please go ahead.
Thank you so much, and good afternoon, everyone. Welcome to our earnings call for AAK quarter 2. Together with me today is Tomas Bergendahl, our CFO, and we will together run this presentation.
We have on the first page, the agenda for today, some highlights of the quarter, as well as comments to key events, and a bit more in-depth on the business and financials. And then after concluding remarks, we will open up for Q&A.
So, let's turn it into Page 3. Summary of the quarter. Well, I think it's fair to say that quarter 2 was a quarter of high volatility and quite a demanding business climate. We, as a company, have been -- decided as well as started to execute a controlled exit out of Russia. We have seen raw material disturbances, one, linked to the invasion of Ukraine by Russia, which has had ripple effects. We have also seen a ban from the government in Indonesia on exporting palm oil, and we have a continued high inflation across the board. We've seen record high raw material prices during the quarter. So, in all essence, a quite demanding quarter.
But despite these challenges, we continue to deliver. Our volumes are up 1% year-on-year, and our EBIT, our earnings operating profit is up 15% year-on-year, supported by strong, favorable FX. When we look at operating profit per kilo, it continues to be strong. It really shows in this dynamic climate, in a high inflationary climate, being able to show continued earnings growth, continued earnings per kilo growth. It shows our capability to handle volatility, to handle inflation and different kinds of disturbances. We have a robust and sustainable operating model.
Next, Page 4. We have had our AGM meeting on May 18. It was nice to see a face-to-face meeting back on the calendar. We've also, during the quarter, strengthened our financial structure by issuing bonds for total of SEK 1 billion.
Now heading into some details on our business areas. First, Food Ingredients on Page #5. We continue to drive for -- improved margins, and margin performance is really what drives the results. Our operating profit per kilo is up, leading to a strong operating profit, which is up 18% year-on-year, up 3% at fixed FX. So also here, we see a favorable FX helping. Continued strong trend in Foodservice, and we continue to optimize our Bakery business, which in turn, helps improve our earnings as well as our operating profit per kilo margin. Also, glad to see that our focus on plant-based food solutions continues to pay off. Our specialty fat systems is grown double digit in the quarter. Although single oils or less special solutions for the sector has shown somewhat more flattish development in the quarter. All in all, a strong quarter for Food Ingredients.
If we then move into Chocolate & Confectionery Fats on Page 6, here we see continued strong volume growth. And keep in mind, our exit from Russia is particularly impacting this business area. So we're showing volume growth despite the fact that we started to execute our control exit -- our Russia -- losing sales into Russia. Our operating profit is up 5%, but it's a slight decrease at fixed FX. However, when looking at Chocolate & Confectionery, if we exclude FX effects as well as looking at it in a like-for-like comparison without Russia or the sales we had into Russia, then we actually increased our EBIT per kilo, our margin also here in Chocolate & Confectionery Fats. So, all in all, a continued strong quarter for Chocolate & Confectionery.
With that, moving into Technical Products & Feed on Page 7. The strong trend that we have seen over the last quarters, continues also in quarter 2. Our operating profit is up 48% year-on-year, and our operating profit per kilo is up 41%. This is driven by a continuous strong demand for natural ingredients for Technical Products & Feed.
And with that, I hand it over to Tomas for comments on raw material prices, cash flow, and some more financial details.
Thank you, Johan. Good afternoon, everyone. Continuing on Slide 8. Raw material prices have seen extreme volatility in the quarter, and markets continue to be very dynamic. As you can see in the graph on the page below, on palm oil, in particular, the peak in price so far occurred in April. And from there, we've seen a roughly 30% drop in price to the end of June. In July, prices have continued down from the June end position. Raw material prices impact our working capital and our capital employed, as you know. And as we've stated previously, a 10% change, all else equal, will affect our working capital by plus/minus about SEK 700 million, and also very importantly, with a time lag of 6 to 9 months.
Slide 9. The quarter generated a positive operating cash flow before interest and tax to SEK 95 million. The cash flow bridge on the page that you're looking at, includes items affecting comparability and the nonrecurring costs related to the exit from the Russian market, impacts both EBITDA and the working capital change. It nets out on both positions, generating the operating cash flow of SEK 95 million. Interest cost has increased from the comparable period, mainly driven by borrowings in high inflation rate countries. And in the accounting, as you can see in our report, this is offset by applying hyperinflation accounting, where applicable in this case, in Turkey. CapEx spend ended up at SEK 255 million in the quarter, SEK 482 million year-to-date. And the guidance for the full year remains at just north of SEK 1 billion. And as previously stated, please bear in mind the gap of 6 to 9 months between changes in raw material prices and impact on working capital. And as previously stated, we expect a continued negative impact for the remainder of 2022 on our cash flows.
Next slide, please. Slide 10. The return on capital employed ended up at 15% for the quarter. But due to the increasing raw material prices and -- it's delayed effect on our working capital. We estimate that the downward trend that you see, will continue into Q3, driven directly by raw material price increases.
Next, Slide 11. The same effect can be seen in the net debt/EBITDA, which is increasing to 2.03%. And also here, this is driven by the increase in raw material prices, and we expect this trend to continue into Q3 based on the prices that we've seen 6 to 9 months back. Johan, back to you.
Thank you, Tomas. And, as mentioned in the beginning, it's also worth concluding. It has been a quite volatile quarter. But at the same time, when you look at the underlying performance of AAK and our underlying trends, we remain optimistic – prudently optimistic about the future. So, all in all, despite the challenges and uncertainties that we have faced, we continue to navigate well, and we deliver strong result. We are an important supplier of plant-based ingredients for food as well as for Technical Products. We are well positioned in the different industries that we serve, and we're also well positioned to manage risk and to deliver value. We have shown that over the past few years of very dynamic business environments.
So, despite continued uncertainty that is needless to say almost -- there is uncertainty in the near term and midterm. But we see no reason to adjust our view on the strong, favorable underlying trends in the markets that we serve. And thus, we continue to remain prudently optimistic about our future, and we are fully committed to living up to our purpose, Making Better Happen.
I'd also like to remind you about us having a Capital Markets Day on the 29th of November this year. So, after the summer holidays, as we come into the late fall, November 29, we will have our Capital Markets Day.
And with that, we are opening up for questions.
[Operator Instructions] Today's first question comes from Alex Jones of BofA.
I've got 3, if I may. The first 2, just going back to the Indonesia palm oil export plan that we debated a lot on this call 3 months ago. The first one, could you just sort of discuss with us, you navigated that and confirm that there'll be no negative impacts on volumes either in this quarter or next quarter? And then the second question, a bit longer term. In your discussions with customers, how has the export ban affected their willingness to use palm oil? Have any of them thought now about reformulating away from it either towards other oils in your portfolio, or to alternatives that competitors offer like cocoa butter, because of the sort of political instability that the ban, even though it was in place for a short time, implies? And then third quick question just on Chocolate margins. You say in the report that they were down 15% year-on-year at constant FX. Can you confirm that's just from the impact of losing Russian volumes? Or is there anything else going on, on the Chocolate margin at constant FX?
Thank you for the questions. I'll take them in order. So first of all, with regards to the ban, we -- it was fortunately enough -- not that long. I mean, it was long enough. It created instability, call it, and we had to kick in some contingency plans and so forth. But in a helicopter view, we were able to manage that without -- so the answer to your question, it was not really an impact to our results or volumes, but we have to manage a bit between factories and where we deliver and so forth. So call it -- we have to manage underneath the surface in order to deliver to our customers, and we did so. And that is -- that was how we managed. And we foresee that we will be able to manage going forward. Having said that -- I mean, there is still risk when disturbances like this come. It creates an additional disturbance to already, call it, kind of volatile raw material markets. But it's not more, not less than that.
With regards to long-term impact, yes, we saw -- we, of course, had conversations with customers immediately with the ban, more in the contingency plan type of matter, what do we do, what can we do and so forth. I wouldn't say that the total picture of products and solutions to our customer base has really changed it, now let's go for this, this, this. There has been a few discussions like that. But keep in mind, AAK, we are specialized in oils and fat -- plant-based oils and fats. We have a broad portfolio of solutions based on different kinds of raw materials. So, in the reformulation asks, we are a good provider, a good partner to our customers. So that brings opportunities as well as a few risks, or maybe losing business to a competitor or to an alternative raw material. But we haven't really seen a weakening demand due to more usage of cocoa butter linked to this. We still have a strong product, good functionality, as well as a price-competitive product versus cocoa butter.
Then, with regards to the CCF margin, yes, we were -- this is the business area within AAK where the impact of exiting Russia has the biggest impact to AAK because Russia is -- was, for us a strong Chocolate & Confectionery Fats market, with also using some of our high value-added, high-priced products. So, when you adjust for that, if we are allowed to, in a like-for-like manner, comparing last year to this year, we actually grew our operating profit per kilo slightly. So, the answer to your question is, yes, it's linked to that. There's nothing else dramatic that has happened in the market at all. Did that answer your questions?
And our next question today comes from Heidi Vesterinen with BNP.
I've got 3 questions as well. The first one is on raw materials. So we see that spot vegetable oil prices have been declining. I wondered how deflation impacts customer behavior. For example, I wondered if they might destock or postpone purchases. Have you seen any evidence of this? And then 2 questions on Food Ingredients. First on Foodservice. I think in the release, you talked about a decrease in U.S. volumes. What are you seeing there? And what is your outlook for Foodservice? And on Special Nutrition, you talked about demand for high-end solutions decreasing. Why is that happening? And what is your outlook? I thought there was a premiumization trend. So just curious on this comment.
If we start with raw material prices, I think you raised a question that is almost rhetorical in terms of how we need to act, right. So of course, with fluctuation, when prices go up, any customer will try to manage that by having the best possible contract in place to offset the inflation. And as prices come down, you want to renegotiate or negotiate so that you get the best impact of that. It is our task to manage our contract portfolio. And of course, it is essential for companies like us that customers -- well, as we live up to the agreements that we have. So, it's up to us to manage our contract portfolio and avoid, call it, breaking contracts or snowballing and so forth. But of course, that is a risk in this environment because people try to optimize their own position.
With regards to Foodservice in U.S., there's no drama we have seen over the years coming out of COVID, that we had a strong pick up, and now we are turning into a more normal situation. So it was not -- no drama. And our comment is kind of U.S. declined somewhat. So call it that we came up -- came back from COVID, and then after that, it's more business as usual, I'd say. And then you had -- could you repeat your third and final question, please?
It was on Special Nutrition. I think you said demand for high-end solutions has been decreasing. So what is driving that? I thought there was a premiumization trend. So what are you seeing and what is the outlook?
Yes. And -- when looking at that, yes, there is a premiumization trend. But as you have heard us commenting also over years now, there is many things moving here, one being the absolute demand in China where most of the high-end specialty ingredients go for this, where birth rates have impacted it to some extent. We've also had a competitive price pressure where we are holding our position in that market. So, when you look at that all in all, well, then we see a slight decrease there. But the premiumization trend is there, and that will -- we think it will continue. As well as when birth rates come up, you'll see a swing in volumes. So it's not new for this quarter at all, and no big drama, but in the year-on-year comparison, a slight decrease there.
And our next question today comes from James Targett with Berenberg.
Just 2 questions left for me. Just firstly on the CCF volumes in Russia just in terms of how successful you've been so far, kind of redirecting any of those. I appreciate it's only been a couple of months. But any kind of color you can give on how -- what progress you've made there? And then just secondly, just on the pullback in palm oil. I mean, is there any insights you're willing to share with us as to where you think prices could stabilize given the current situation? That'd be very helpful.
And with regards to Russia, obviously, it's not as easy to just reroute. If it was easy, then we could have sold more even before that, right? But obviously, when situation happens like it did, then you focus your efforts on trying to reroute as much as you can. It's not rerouting. It's rather trying to open up new channels, competing in different markets and raising the bar, raising the ambition to sell to other regions, other customers when these customers are not sold to anymore.
And that's what we are doing, and we're doing it well. But, of course, when we stopped supplying into Russia, that has -- that had an immediate impact. And as we commented, it's between SEK 30 million to SEK 40 million of impact to our P&L sheet in a year-on-year comparison. We repeat that we think that the yearly impact is around SEK 75 million to SEK 100 million, probably to the upper part of that spectrum linked to us not selling into Russia basically.
But at the same time, as you can see, despite that we're showing 7% volume increase. So that's strong. I mean, we have a strong position in this market. As I said before, we're not alone in the market, but we have a strong position, and we clearly see other markets growing a bit when we have stopped selling into Russia, and we have good opportunities to do that. But again, in a like-for-like comparison, those are lost volumes, and we need to scale up as much as we can in other the regions.
Then, last comment there on palm oil price development. Very difficult, of course, to forecast because we are not alone in this market. Meaning, as an industry, there is a lot of palm oil going into feeding the world, an extremely important raw material for affordable food across the world. At the same time, it is also feeding the replacement of fossil-based fuel into renewable energy et cetera. So, it's extremely difficult to forecast where the prices will go. It all depends on government decision, demand and the split between food and energy or fuel where palm oil is used in both areas.
And our next question today comes from Oskar Lindstrom with Danske Bank.
A couple of questions from me. The first 2 are actually follow-ups to previous questions here. And number one here is on the infant segment. I mean you said -- I didn't quite understand the answer on how you had a premiumization trend and yet the high-end volumes are declining. Is this because you're losing market share essentially in the premium segment in infant in China? My second question is on Russia. Is the negative effect fully now in -- what we see in the second quarter? Or were you -- were there some residual income from Russia that we won't see in the third quarter? And then finally, just on other -- your exposure to natural gas. I know it's not a significant source of energy for you. But are there any sort of indirect effects that you could see or that we should be aware of, if we have a situation later this year with limited availability? So those were my 3 questions.
And first on the premiumization. So the premiumization trend is that, in this case, parents are prepared to pay more to buy advanced solutions and pay more for premium, all right? That's the trend. But if you then have a birth rate reduction, there are less babies. Meaning, you're prepared to buy something of higher quality and higher price for your baby, but you only buy as much as you need to feed that baby.
So it's fully possible that volumes are down while a premium essential trend is up. And then adding to that, there is a premiumization trend, but that doesn't mean that necessarily every ingredient can be higher priced just because the final product is priced higher because of higher quality. There is still a competitive landscape, business dynamics for any type of product, any type of ingredient.
And as we mentioned a few times, we are also in a competitive situation in China. So we're not alone. We cannot just increase prices just because of a premiumization trend if there is competition meeting us, right? So it's really possible to have that trend while not growing specialty segment quarter-by-quarter. But at the same time, again, we are well positioned. We still get our products into this market. They are in with good margins, high margins compared to the average of AAK. So we are still positive, optimistic. We're well positioned, but these are the dynamics in that market.
With regards to Russia, we had the biggest impact of our exit of Russia in this quarter. It's a controlled exit with both as exiting our, call it, AAK local market company business as well as our JV. So, in that controlled exit, we have now been able to exit that in a good way, but there has been some residual business in Q2 under the controlled exit. Yes. So there will be a slight impact further into Q3, but this was the bigger impact, or the bigger step, call it.
Then with regards to natural gas exposure, again, very difficult to see. But of course, we've seen the environment that we operate in now, high volatility, high uncertainty. Of course, something on top of that could cause something for us, most likely more so visible in energy prices where we have shown capability to manage, navigate and also price our products in the market. And Tomas, adding to that.
No, it was just back to the Russia question as well. Just to restate again that we still believe that the full year effect will be the SEK 75 million to SEK 100 million. So, even though we've seen the biggest impact now, and there were some residual volumes, we are also reallocating into new geographies, right? So just to bear that in mind...
Exactly.
We look at the upper span of the SEK 100 million.
Yes.
Just to maybe follow up then on that answer you gave on Russia. You've given before the SEK 75 million to a SEK 100 million span, and you're saying maybe up -- closer to the higher end of that. On a quarterly basis -- and then you've also said that there should be a net effect after redirecting of, if I remember correctly, SEK 30 million to SEK 40 million negative, after having redirected. So, in the second quarter, we didn't see the full annualized negative impact from the exit of Russia. But also we didn't see the full effect or any effect of redirecting volumes to other markets. So, what was the sort of net impact in the second quarter, if possible?
The net impact is the SEK 30 million to SEK 40 million that we've outlined in our report. There was also a slight negative effect in Q1, and then the remainder to the annual spend is what we're looking at in Q3 and Q4 collectively, to get to the...
All right. So if you try to make it simple, I mean, we're losing everything we sold into Russia before. And then of course -- and then that opens up an opportunity to sell somewhere else. And then, we're trying to make the best estimate of that in a like-for-like perspective. So -- and that's what we call the net impact. And the net impact this quarter was roughly SEK 30 million to SEK 40 million in a like-for-like comparison. And if we are specific, then the remainder of the year is the residual and that would mean something like SEK 25 million to SEK 30 million a quarter, could be a bit different by quarter.
And our next question today comes from Alex Sloane at Barclays.
I mean maybe -- Sorry, maybe adding to that. And majority of that, Oskar and everyone else, is in the CCF, our Chocolates & Confectionery business area, if you want to be more specific. Sorry, Alex.
Yes, no problem. So maybe -- actually just the first one -- sorry to continue -- on the Russia line, but, would you be able to just kind of maybe give us some color on, within the 7% volume growth in the quarter, what was the impact of exiting Russia in the quarter? And what will that be in the second half on volume based on Russia kind of being exited entirely? Whereas in the quarter, you talk about controlled exit. That would be really helpful. The second one, just a small clarification on CC&F. Obviously, the world's largest chocolate factory is currently shut down. Is there any impact that we should expect on AAK from that in Q3 or not? And the final one just on Technical Products. Obviously, very strong improvement year-on-year, but a bit weaker sequentially, a bit weaker than consensus had in sequentially. I think you had primed us to expect seasonally weaker biofuel demand. I was just wondering if there's anything sort of beyond that in the sequential decline on profitability. How is the crush margin in the quarter? And how does that look going forward?
And, well, we haven't -- we're getting into a lot of details on Russia where we haven't reported all of that. So, I'll stand a bit short on the first question. But just to give you a bit more color, right, we have our 7% increase in this quarter despite exiting Russia. We have had a good trend on Chocolate & Confectionery over many quarters. So now going forward, I think, this quarter is close to a full exit of Chocolate volumes in Russia, or for AAK into Russia. So, I think that's what we can give you at this stage.
With regards to CCF and other companies' issues, we haven't seen a major impact to AAK at this stage, and we will continue to support all our customers independent of what issues they would have or not have with their production. So hasn't seen a big impact as of now, and on forecast to be. I think that's as much as I can -- I will not comment any specific company directly. TPF, weaker biofuel more linked to seasonality than anything else. Still strong position in the market. The trend around replacing fossil-based ingredients into different types of technical solutions is still there. We believe strongly in that going forward as well. And gross margins has been more -- on a year-on-year perspective has more -- been more flat. Not a big increase, but still a high -- good levels.
That's very helpful. Just -- maybe just to squeeze one more in on the TP&F. Would the -- kind of the second quarter profitability level be kind of more what we should be thinking for the second half? Or should we be thinking somewhat closer to the first quarter?
I'd say that the -- when you look at the year-over-year, the second quarter is the lowest performing quarter on an annual basis, and it's -- part of the logic there is the maintenance stop that we always run in Q2. So I'd say, for guidance, look at the seasonality quarter-by-quarter and what we -- how we have performed in the past, I would say. But the maintenance stock is a key impact in Q2. And it's planned, but it's in Q2 every year.
And last year we had a longer maintenance stop than this year.
Yes.
So, when you compare Q2, we now run more days in Q2 than we did in Q2 last year. If everything else stays the same, we would expect next year's Q2 to be the same days of running as this year's Q2. It was last year that was a bit shorter than normal. Then, when you look at -- as Tomas said, into Q3, then rather compare Q3 last year, which was more normal, but still with high crushing margins. So no big drama that, but still continuous strong trend for natural ingredients is our expectation.
[Operator Instructions] Our next question today comes from Per Jorgensen with I&T Asset Management.
Just a question regarding the capacity. If you take a look at what happened before COVID, during COVID and after COVID, you are around 2.3 million tonnes in total. Will we still see some further investments in new capacity? Is SEK 1 billion enough to put some more capacity? Or will we see some more strategic moves for you? That's my first question. And my second question is regarding this product portfolio management where you have been quite capable of transforming your Bakery business and get Foodservice back in -- back on track. I gather that Bakery and Foodservice is still around 60% of Food Ingredients. What's left in this product portfolio management on the margin side?
And first on the capacity side. We are growing. We have a focus to continue to grow. That's our strategy. So, there will be more capacity needed. I reiterate what we have said before, we are looking for a combination of acquisitive growth as well as organic growth. So, if we have the opportunity to acquire a company that is up and running with capacity -- room for growing, that's very nice, or even a asset more brown like -- brownfield-like asset, and we would do that as well. If that's not possible, then we will go for greenfield. So yes, it's there. And the short answer to your question is yes, we will continue to invest in capacity.
But we're also investing in optimizing our existing footprint with -- looking at how we can run productivity, projects and squeezing more capacity out of the already existing assets, doing debottlenecking as well. That is also ongoing, has been ongoing, of course. So, at the moment, we have no other forecast than the one we have given on CapEx. M&A comes on top of that, of course, when and if we can execute that.
With regards to portfolio management -- thank you for highlighting and reflecting on that. It's been successful within -- especially within Bakery, also within Dairy. There is more to do. This is an area where AAK can do much better. So, in terms of what's left to give, well, we're closing in on pre-COVID, call it, volumes in Foodservice. So that kind of rebound effect is there, but we still have an opportunity to perform better in the market. There's still opportunity to optimize Dairy, Bakery portfolios, but we also have the potential and opportunity to optimize further. So, we're running in our critical enabler project linked to our strategy that we launched, which is a portfolio-based industry-focused strategy, but we're also running across the board, product management, and getting better at running product management, and there is still opportunity to drive margin improvements out of that from the -- our total portfolio of products.
And portfolio and product management also affects capacity. So that's something we keep in mind when we choose production lines and how to run it and so forth.
Okay. But you will still be able to get a few percentage points per year out of the volume with the present capacity? Or do you need a new factory or an acquisition to get to the next level, so to say?
We will see...
And still keep your ambition to grow the EBIT with plus 10% a year on average?
To deliver on our target, our ambition, then we need more capacity, yes. The answer to your prior question, will we be able to get more capacity out? Yes. But we will not be able to get enough capacity to deliver year-on-year on the 10% improvement without also adding either greenfield or acquisitive capacity.
But that has also been your history in the past. So that's no new information, so to say.
No. I would say that -- I take the opportunity based on that to comment. I think what is now different to maybe 3, 4, 5 years ago, it's an extreme volatility around us. We have been through the years of COVID, and now we have a critical situation in Europe with a war ongoing as well as an extreme inflationary pressure. And I think that's where -- looking at all of that, you could also turn around and say, well, AAK stands strong. We continue to deliver, we're able to manage. There will be bumps on the roads up and down, but we also -- we just show our strong operating model -- our business model. Nothing is given for the future, but we stand strong at the moment.
Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for the final remarks.
Thank you so much. Thank you for calling in. That concludes our Q2 earnings call. Again, thank you for the questions. And to summarize it one more time, extreme volatility, extremely dynamic. And at the same time, we are an important supplier predominantly into -- with Food Ingredients into the food sector, also important ingredients into Technical Products, and that is always good in a very dynamic environment. So, we remain prudently optimistic. Thank you for listening.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines now and have a wonderful day.
Thank you so much.